Please ensure Javascript is enabled for purposes of website accessibility

Is Aurora Cannabis Repeating Past Mistakes?

By David Jagielski – Updated Jun 12, 2020 at 2:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors shouldn't be so quick to assume that the stock has turned things around.

Aurora Cannabis (ACB 4.31%) gave investors a pleasant surprise when it released its third-quarter results on May 14. The company's net sales were up 35% from the second quarter, and it incurred a smaller loss. The stock would go on to skyrocket, tripling in value in the days following the release of the results.

However, that doesn't mean that the company's out of the woods and is a safe buy just yet. Aurora may even be setting itself and its investors up for some disappointing results later on this year, and here's why.

It's creating some lofty expectations, again

Last year, Aurora was projecting to hit positive earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fourth quarter of fiscal 2019. On its third-quarter earnings call, the company said that it was still "on track" for that target. However, when the company reported its Q4 results, it had an EBITDA loss of 11.7 million Canadian dollars. While it was an improvement from the CA$36.6 million EBITDA loss it had in Q3, it was still a loss nonetheless.

Cannabis plant in close up.

Image source: Getty Images.

Between the EBITDA miss and Aurora missing its own sales forecast for Q4, the quarter was a colossal failure for the company, as the stock declined even further in the weeks and months to come.

Now, Aurora is once more projecting that it is "on track for EBITDA profitability" for the first quarter of fiscal 2021. Many companies are withdrawing their guidance due to the uncertainty surrounding COVID-19, but Aurora's doing the opposite.

Previously, when Aurora missed its goal for EBITDA profitability, Michael Singer, who is now the interim CEO after Terry Booth resigned in February, blamed the disappointing retail rollout in Canada for the lackluster results. However, there's arguably greater uncertainty when it comes to the COVID-19 global pandemic. And yet, Aurora's making a very optimistic goal for the future.

If it falls short of its expectations, investors may not be as willing to let the company blame it on the pandemic, given it was aware of the uncertainty ahead, as were other companies. And that could lead to another big sell-off of the stock. Year to date, Aurora's stock is down 50%, while the Horizons Marijuana Life Sciences ETF (HMLSF -11.90%) has declined just 16%.

The company may still be too focused on expansion

When Aurora announced that it was acquiring the U.S. cannabis company Reliva on May 20, investors were in a frenzy and overreacted to an opportunity that wasn't all that exciting. The hemp market in the U.S. is crowded as it is, and Reliva's annual sales come in at around just CA$14 million. In the meantime, Aurora will spend as much as $45 million in shares to buy the company, further diluting its shareholders.

The price isn't what's concerning as it is that it could be a sign that Aurora is focusing too much on a growth opportunity that isn't the game changer it wants investors to believe it is. By comparison, rival Canopy Growth (CGC 4.38%) announced in April that it was exiting from or scaling back its operations in some countries in an effort to bring its costs down. Unless Aurora is completely committed to bringing its costs down, it'll be hard to believe that EBITDA profitability will be a reality come Q1. Aurora's acquisition of another company suggests that is not the case. 

Aurora still has a lot to prove to investors

It's tempting to buy into the headlines and believe that the Alberta-based cannabis producer has turned things around. But the reality is that's not the case, at least not yet. Its sales in Q3 were up in large part because it had fewer returns and adjustments. And achieving EBITDA profitability during a recession and amid a pandemic will be a bold target to reach.

Aurora is building up expectations, and that hasn't worked out well for the stock in the past. It could lead to some big disappointments later this year. Overall, Aurora's still a very risky pot stock that investors should think twice about buying.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.21 (4.31%) $0.05
Canopy Growth Stock Quote
Canopy Growth
$2.86 (4.38%) $0.12
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$4.00 (-11.90%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.